An alternative to cocker spaniels

The idea that loyalty pays is being severely tested by the economic downturn

OVER the past few years, much has been made of the value to companies of loyalty—the loyalty of customers, suppliers and employees. The high priest of the loyalty cult is Frederick Reichheld, a director at Bain & Company, a consultancy firm, and author of “The Loyalty Effect”, a 1996 bestseller which argued that engendering loyalty makes sound economic sense. “Business loyalty,” said Mr Reichheld, “was considered an oxymoron not so long ago.” Crude downsizing in the early 1990s crushed the loyalty of millions. “You want loyalty?” asks the ruthless bond trader in Michael Lewis's “Liar's Poker”. “Then get a cocker spaniel.”

The economic benefits of employee loyalty are real enough. They include lower recruitment and training costs, the higher productivity of experienced workers, and the positive effect that such workers have on customers and future employees. In the present economic downturn, some companies are trying to hang on to these benefits at the same time as they trim their labour costs.

For example, Accenture, a large consultancy, has introduced a scheme for its staff called FlexLeave. This enables them to receive 20% of their salary, plus their employer-provided benefits, while they take a 6-12 month sabbatical. In effect, the company has bought a call option on their services. Come the upturn, they will be available to return to the fold. Accenture says the scheme, introduced in America in June, “was extremely well received”. It is now being extended to Europe and Asia.

Siemens, a German electronics giant, is to introduce a similar scheme on September 1st. Employees in Munich and Berlin who work for its mobile-communications division (which lost euro511m—$446m—in the three months to June) will be able to apply for leave of between three months (on 50% of pay) and 12 months (on 20%). The company thinks that the lean times will not last. Although Germany has high unemployment, skilled labour is scarce and Siemens does not want to lose it altogether. The “war for talent” continues, albeit on a narrower front.

How does a company retain the benefits of employee loyalty while simultaneously laying people off?

Other companies have a bigger challenge: to retain the benefits of loyalty at the same time as they lay people off. There are two risks here. One is what has been termed “layoff survivor syndrome”, the tendency of those who remain to be demotivated by anxiety, guilt and an extra workload. The other is of ex-employees bad-mouthing the company about how they have been treated. “Crass firings harm an employer's reputation and ability to attract the best employees,” says Richard Bayer, chief operating officer of The Five O'Clock Club, a New York-based career-counselling network.

Cisco Systems, one of Mr Reichheld's model loyalty-builders, recently introduced a novel scheme that attempts to minimise both risks. It has offered those people it laid off this year at its Californian headquarters the option to work for a year for a charity linked to the company, and to be paid a third of their salary plus options and bonuses. This eases the burden of redundancy and gives a “caring” signal to the employees who remain.

Once upon a time in Japan

Not long ago, western firms would have turned to Japan for advice about how to foster loyalty. Companies there were thought to have an inside track on the subject. The Japanese “salaryman” traded loyalty, punishing hours and obedience for lifetime employment and security, and everybody benefited.

But the idea was always something of a myth. The “lifetime” security lasted for little more than 30 years (most salarymen retired on a negligible pension at 57), and it applied only in the biggest companies, representing probably no more than one-third of the workforce. The rest of the labour market was scarcely more loyal than a Wall Street bond trader.

Carlos Ghosn, the Renault executive sent in to save Nissan, undermined what remained of Japanese-style loyalty when he announced in 1999 that 21,000 of the car maker's employees would have to go and five domestic factories would be shut for good. Other large Japanese companies followed his example and they are now painfully (if belatedly) also downsizing. This week Fujitsu announced that it will cut its global workforce by 16,400, or 9%, by next March (see table).

Although many of these cuts have been designed to minimise job losses inside Japan (and maximise those elsewhere), loyalty is fast going out of fashion among Japanese youth. They see the pact that their fathers made as lifetime slavery; increasingly they prefer to work part-time or as temps.

Mr Reichheld is now offering what Japan cannot: a guide on how to engender loyalty. He has a new book out this month (“Loyalty Rules”) and an article in the latest issue of the Harvard Business Review in which he argues that loyalty stars (such as Harley-Davidson, Enterprise Rent-A-Car and the MBNA credit-card organisation) have certain features in common. One of the less obvious is that they tend to be organised in smaller teams than their less successful rivals.

The value of small teams is something that military folk have long been aware of, and it may be no coincidence that Charles Cawley, president of MBNA, is an ex-marine. Mr Reichheld says that the ideal team size for companies is between five and ten, depending on the industry.

The loyalty stars also tend to have selfless leaders who communicate clearly that loyalty matters. Communication of such messages is being made easier by the development of in-house corporate Intranets (see article). Leadership, though, still seems to be disporportionately rewarding. This week an annual survey by PricewaterhouseCoopers, a large accounting firm, showed that the bosses of the biggest British companies saw their total earnings rise last year by 16.7% while average earnings went up by only 5.9%. Disparities like that eat up loyalty like a computer virus.